The S&P 500 declined 1.45 percent, the worst decline since May.
The Nasdaq composite dropped 2.1 percent, with Apple, Alphabet, Amazon
and Netflix all trading lower. It was a broad-based decline on Wall
Street. The CBOE Volatility Index (VIX), a gauge of fear in the market,
soared more than 40 percent to trade at 15.98. It also hit its highest
level since May.

President Trump said North Korea would face “fire and fury” if it
threatened the United States. North Korea dismissed the warnings as a
“load of nonsense”, and outlined plans for a missile strike near the
Pacific territory of Guam.

And today, Trump ratcheted up his rhetoric,
saying his “fire and fury” comments may not have been tough enough, and
North Korea should be “very, very nervous”. China is the largest
trading partner with North Korea and China has called for dialogue to
end the crisis but has otherwise been quiet.

China’s interests do
not include a unified Korean Peninsula. When it comes to assessing
global geopolitics like the situation with North Korea, we don’t know
how this will play out. It could be a brilliant bluff or it could be
very dangerous bravado.

Here’s what we might see in the marketplace: stocks tend to react
badly to the prospect of war but the exact reaction varies
significantly, Treasuries generally move higher – pushing yields lower
(The yield on the benchmark 10-year note touched 2.20 percent Thursday,
its lowest level since June, although it is worth noting that junk bonds
have taken a hit recently – and that may be separate from concerns
about war; the cost of protecting high-yield bonds against default in
the credit-default swap market has climbed to the highest since
mid-July), oil and other commodities tend to jump ahead of a
geopolitical event and sell off afterwards.

And of course, gold has
started to shine again.

Pimco told investors to pare U.S. equities and
junk bonds, but keep exposure to real assets, such as inflation-linked
debt, commodities and gold. T. Rowe Price cut its stock allocation to
the lowest level since 2000. Morgan Stanley strategists said investors
should consider betting against U.S. junk-bonds as recent price weakness
may be the beginning of a correction.

Geopolitical turmoil tends to
drive volatility but not necessarily trends. In other words, the
contrarian play usually works. Warren Buffett has described the strategy
as “stay calm when all hell breaks loose.”

Meanwhile, it is a big distraction from other issues such as tax
reform, the debt ceiling and healthcare – which you probably thought was
a moot point by now. Senate Majority Leader Mitch McConnell is refusing
to sign-up for an ambitious White House timeline on tax reform that
calls for legislation to sail through by fall.

And he’s now engaged in
an extraordinary war of words with the Trump White House. McConnell said
he thought Trump “had excessive expectations about how quickly things
happen in the democratic process …” This drew a sharp rebuke from Trump
and his senior aide Dan Scavino.

The White House is going to need good
will from McConnell on tax reform. And they’ve already blown through the
initial, absurd, August deadline. Increasing pressure and publicly
ripping McConnell is going to make tax reform and the rest of Trump’s
agenda even harder to pass.

Meanwhile, there is a very real deadline for a deal on the debt ceiling.
Mark your calendar. You can see this one coming: The government will
run out of cash on Sept. 29 and cannot borrow more money unless Congress
raises the debt ceiling.

This is a perennial crisis, and markets have a
well-rehearsed pattern of worry followed by relief. Lawmakers are on
recess until Sept. 5, and they plan to take a week off in September. So
that leaves 12 working days for Congress to raise the borrowing limit.
It’s difficult to give Congress the benefit of the doubt on getting this
done.

The White House is usually focused on this priority, but in the
wake of the health-care defeat in the Senate, White House budget
director Mick Mulvaney initially said that Congress should hold off on
all other issues, including the debt ceiling, until it went back to
health care. He later changed his position and said Congress should
raise the debt ceiling.

McConnell and House Speaker Paul Ryan will push
for a clean debt ceiling increase, but some number of more conservative
members will vote against that, meaning Democrats will need to provide
votes to ensure a successful vote. But it’s not clear what conditions
Democrats will demand in exchange for their votes.

Senate Minority
Leader Chuck Schumer said earlier this summer that Democratic votes may
be hard to come by if Republicans insist on passing a large tax cut for
the wealthy. And the White House is pushing for funding for a border
wall with Mexico to be included in a debt bill, in exchange for lifting
spending caps.

PredictIt has become the go-to prediction market for
observing U.S. political events. PredictIt offers weekly debt ceiling markets through
the end of October, and at the time of this writing, its participants
give less than a 5 percent chance of the debt ceiling being raised by
Sept. 15, and less than a 15 percent chance of it being raised by Sept.
22.

If the Trump administration’s Sept. 29 estimate is right, then we
could be looking at another tense period for markets like we had in the
summer of 2011, when the debt ceiling standoff caused Standard and
Poor’s to lower the U.S. credit rating.

Of course, it’s possible the real deadline will be a week earlier or a
couple weeks later, given volatility in tax receipts. So, if you mark
your calendar, be sure to use a pencil.

Also, today, Trump declared the opioid epidemic
a national emergency and said his administration was drafting papers to
make it official – this comes about a week after a White House
commission on the opioid crisis led by New Jersey Governor Chris
Christie recommended the president declare it a national emergency.

The
declaration could help unlock more support and resources to address the
drug overdose epidemic, such as additional funding and expanded access
to various forms of treatment, and it gives the government more
flexibility in waiving rules and restrictions to expedite action.

National emergencies are typically declared for short-term crises, such
as the Zika virus outbreak or a natural disaster. It is unclear what
Trump’s declaration will mean for a complex, long-term public health
problem.

Producer prices
fell in July, recording their biggest drop in nearly a year and
pointing to a further moderation in inflation that could delay a Federal
Reserve interest rate hike. The Labor Department said its producer
price index for final demand slipped 0.1 percent last month, weighed by
decreasing costs for services. That was the largest decline since August
2016 and reversed June’s 0.1 percent gain.

In the 12 months through
July, the PPI increased 1.9 percent after rising 2.0 percent in the year
through June. Core PPI, which excludes food, energy and trade services
was unchanged last month. The core PPI increased 1.9 percent in the 12
months through July.

Shares of retailers Macy’s and Kohl’s declined after quarterly
results failed to assure investors that a comeback was taking hold.
Same-store sales dropped 2.5 percent at Macy’s and 0.4 percent at
Kohl’s. Dillard’s sank as much as 16 percent to $61.50 after posting a
surprise loss in its second quarter.

Lots of people like to talk these
days about how the retail industry is undergoing a structural shift due
to changes in how consumers like to shop. But weakness in the retail
sector is probably being impacted by consumer debt as well.

Household
debt outstanding — everything from mortgages to credit cards to car
loans — reached $12.7 trillion in the first quarter. Household net worth
stands at a record $94.8 trillion, thanks to rebounding home values and
soaring stock portfolios. But that increase has primarily benefited the
nation’s wealthiest.

For most Americans, whose median household income,
adjusted for inflation, is lower than it was at its peak in 1999,
borrowing has been the answer to maintaining their standard of living.
The average family of four is living paycheck to paycheck.

And just when you think you’ve got it all figured out. Nordstrom reported
second-quarter earnings and sales that topped analysts’ expectations,
sending shares of the stock higher after market close. Same-store sales
were also positive, a rare outcome among department stores of late. Nordstrom said its results this period was fueled by more customers
ringing up purchases online.

Nordstrom’s stock was last climbing more
than 3 percent higher in after-hours trading on the news.

Graphics chipmaker Nvidia saw its stock fall more than 7 percent
after it reported stronger-than-expected earnings for the second
quarter. Earnings came in at $1.01 per share, topping estimates of 70
cents. Revenue was up 56 percent year over year and beat estimates. They
raised guidance slightly.

A new international report has confirmed that 2016 was the hottest
year for the planet in 137 years of record keeping. It was the third
year in a row to break the record. The report was released by the
American Meteorological Society.

Almost 500 scientists from more than 60
countries participated in the project. Global sea surface temperatures
reached a new record high, and Arctic sea ice extent at the end of its
annual growth season was at its lowest maximum level in the nearly 40
years of satellite records.

Every month, at least 12 percent of land
surfaces were in severe drought conditions or worse — a record long
stretch.

Disclaimer: The material appearing on this site is based on data and information from sources we believe to be accurate and reliable. However, the material is not guaranteed as to accuracy nor does it purport to be complete. Opinions and projections, both our own and those of others, reflect views as of dates indicated and are subject to change without notice. The contributions and opinions of others do not necessarily reflect the views of Marvin Clark, Monsoon Wealth Management, or Fixed Income Daily. Nothing appearing on this site should be considered a recommendation to buy or to sell any security or related financial instrument. Investors should discuss any investment with their personal investment counsel. Past performance does not guarantee future results.